The European Insurance and Occupational Pensions Authority (EIOPA) published today the results of its 2025 stress test of occupational pension funds, which assessed the sector’s capacity to withstand rapid movements in yield curves and the liquidity pressures that arise from hedging positions when market rates shift quickly. The stress test confirms that the European occupational pensions sector – with investments in large and deep markets and diversified exposures to marketable securities – has sufficient liquidity buffers on aggregate to absorb shortfalls. At the same time, the tested scenarios underline that liquidity risks, particularly margin calls, can pose a threat to institutions for occupational retirement provision (IORPs). While IORPs demonstrated both flexibility and expertise in managing liquidity challenges without creating material spillovers to other markets, robust liquidity management processes remain crucial, especially for entities using derivatives.

This year’s stress test is the first pan-European exercise to focus specifically on liquidity risks in the occupational pensions sector. It follows recent episodes of financial stress — such as the 2022 UK gilt crisis and the 2023 US regional banking turmoil — which demonstrated that different triggering events can create liquidity strains for certain segments of the financial sector when rates and risk premia rise sharply. Liquidity strains can also be triggered by adverse developments in the current geoeconomic and geopolitical tensions. The exercise set out to explore the extent to which IORPs in the European Economic Area (EEA) could cope with similar shocks and where vulnerabilities would be the most pronounced. The results should be interpreted in light of the focused approach, which targeted only the asset side of the balance sheet of the IORPs and of the severe but plausible set of shocks (e.g. haircuts).

Relevant scenarios with a dynamic and realistic implementation

The stress test probed European IORPs’ resilience to geopolitical tensions, making the exercise and its findings highly relevant in today’s tense and uncertain macroeconomic environment. Under the ‘yield curve up’ scenario, interest rates rose rapidly and the euro fell in response to a sudden escalation of geopolitical tensions, bringing trade disruptions, high commodity prices and an upward revision of inflation expectations. In the ‘yield curve down’ scenario, interest rates dropped and the euro depreciated as markets abruptly priced in the effects of a protracted period of geopolitical tensions with low investment, weak demand and a worsening economic outlook for the region. Both scenarios triggered asset price corrections, higher volatility and a loss of confidence in financial markets.

To learn how IORPs would respond to similar events in real life and assess potential spillovers, participating entities were permitted to apply reactive ‘management actions’ (e.g. sale of assets, reduction in trading activities or rebalancing of portfolios) to mitigate the impact of the shocks. In a bid for even more realistic results, risk-sensitive liquidity haircuts were introduced to various asset classes to mirror the difficulty that liquidity-stretched IORPs face when selling into a downward market.

Results confirm liquidity matters

The stress test results show that IORPs’ practices of hedging against a drop in interest rates and against a fall in the value of the euro via derivatives can expose them to considerable liquidity risks under the scenarios tested. Given the combined effects of rising rates and euro depreciation, the ‘yield curve up’ scenario proved more challenging to IORPs than the ‘yield curve down’ one, where interest rates declined.

The ‘yield curve up’ scenario triggered substantial variation margin calls for IORPs as well as additional liquidity needs from market shocks. Although IORPs started the stress test from an aggregate liquidity position of around 74 billion euros (referring to cash and cash-equivalent holdings), their post-stress results without management actions show an overall liquidity shortfall of 60 billion euros – that is, 134 billion euros lower than the baseline. Post-stress results left 68 of the 156 participating institutions with a negative liquidity position, meaning that they would have had to resort to asset sales to cover liquidity needs. With management actions allowed, IORPs managed to recover their aggregate liquidity position into positive territory (15 billion euros). However, 27 entities still lack sufficient cash to meet margin calls, which must be covered swiftly and, with some exceptions, in cash.

Broader sustainability metrics covering liquid assets on top of cash and cash-equivalent holdings nevertheless point to a resilient sector with solid aggregate liquidity buffers. The baseline’s 1.44 trillion euros in liquid assets drops to 1.14 trillion euros without management actions and to 1.20 trillion euros with management actions, with no participants reporting negative sustainability indicators.

The overall results reveal that while IORPs face sizeable liquidity risks when interest rates rise rapidly, they have the risk management expertise and sufficient liquid assets at their disposal to cover liquidity shortfalls. Even as IORPs reduce the volume of their trading activities, they remain net buyers, containing the shocks without generating spillovers. 

Next steps

Although the stress test had a primarily micro-prudential approach, it is not intended as a “pass or fail” exercise. Nevertheless, the findings provide a valuable basis for follow-up dialogue between supervisors and participating IORPs on the vulnerabilities identified. The insights of the stress test will also support EIOPA in its work on the supervision of IORPs’ liquidity risk management.

Petra Hielkema, Chair of EIOPA, said: “Our liquidity stress test of IORPs highlights two important points. First, it confirms that the increased focus on liquidity risks by industry participants and supervisors in recent years is strengthening the sector’s preparedness. Second, it shows that Europe’s occupational pension sector is generally well placed to withstand periods of liquidity strains that might lead to more turbulence in smaller, less diversified or more derivatives-heavy markets. That said, we will continue to closely monitor liquidity risks in the sector, particularly as allocations to illiquid assets — such as private credit, real estate and long-term infrastructure — keep rising.”

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Background information 

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